Monday, July 18, 2011

Are Public Pensions a "Vested Right"?

Legal analysis carried out by the California Public Employees’ Retirement System (CalPERS) has ruled that pension promises made to current and retired members are a “vested right” and protected under State and federal laws.

The analysis, "Vested Rights of CalPERS Members," articulates provisions found in the contract clauses" of State and federal laws, concluding that the laws establish that public employee retirement benefits are a form of deferred compensation and part of the employment contract.

"The law is very clear - a promise of a pension made by a public employer to its employees is a promise the employer must keep," said Anne Stausboll, chief executive officer for CalPERS.

"We prepared this analysis for two reasons. First, to reaffirm the provisions of the law regarding the nature of our members' pension rights; and second, to outline CalPERS roles as fiduciaries and stewards of the pension fund. We need to ensure that our members' vested rights are honoured."

CalPERS analysis looked at more than a dozen California appellate cases over the last 70 years and identified several rules which have emerged from court decisions, including:

Employees are entitled to benefits in place during their employment, meaning they obtain a vested right to the provisions of the applicable retirement law that exists during the course of their public employment.

RRetired and inactive members have vested rights to the benefits promised to them when they worked.

Employees are entitled only to amounts reasonably expected from the contract. Vested rights protection does not extend to unreasonable or unanticipated windfalls.

The State's "emergency" powers are extremely limited and cannot be used to reduce the benefits that have been promised. The State's emergency powers do not enable it to solve its budgetary problems by eliminating or reducing the long-term benefit promises it has made.

Future employees have no vested rights.

Only lawful contracts with mutual consideration are protected by the contract clause.

Active employees' vested rights may be unilaterally modified only under extremely limited circumstances. Modifications must be reasonable and must bear some material relation to the theory of a pension system and its successful operation. Changes that result in disadvantage to employees generally must be accompanied by comparable new advantages.

The report added if a pension reform proposal for current employees were to be enacted it would still have to "pass muster" under the Contract Clause of the California Constitution. If a proposed amendment eliminated the State Constitution's Contract Clause, the Contract Clause in the US Constitution would still give rise to the same protection of vested rights as the State Constitution.

"The assumption by authors of pension reform proposals that amending the State Constitution will avoid a constitutional challenge to altering vested retirement benefits is misplaced," said Peter Mixon, CalPERS General Counsel.

"Without consideration of State and federal rules, well-intentioned proposals may only lead to increased litigation and administrative costs that will further increase the costs of providing benefits."

You can download the CalPERS' report by clicking here. There is no question that retired, inactive and active members have more "vested rights" than future employees. They paid into their pensions, contributed part of their wages, and expect their employer to deliver on the pension promise. Having said this, when the money runs out, like it did in Greece, all bets are off and even if these "vested rights" are protected under the Constitution, the government can turn around and cut benefits and repeal all vested rights.

In other words, when it comes to pension benefits, public sector employees have a lot more protection under the law than their private sector counterparts but anyone who thinks that these "vested rights" are immutable and enforceable under any circumstance is simply deluding themselves. When catastrophe strikes, the only "vested right" you have is the right to survive as best as you possibly can. If the money runs out, you will see deep cuts in your pensions.

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